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The Effects of the Exchange Rate on Investment: Evidence from Canadian Manufacturing Industries

Tarek Harchaoui (), Faouzi Tarkhani and Terence Yuen

Staff Working Papers from Bank of Canada

Abstract: Using industry-level data for 22 Canadian manufacturing industries, the authors examine the relationship between exchange rates and investment during the period 1981-97. Their empirical results show that the overall effect of exchange rates on total investment is statistically insignificant. Further investigation reveals the non-uniform investment response to exchange rate movements in three channels. First, it is important to distinguish between environments that have low and high exchange rate volatilities. Through changes in output demands, depreciations would have a positive effect on total investment when the exchange rate volatility is low. Yet, this stimulative effect becomes considerably smaller as the volatility increases. Second, these results for total investment are mainly due to movements in other machinery and equipment, and not to investment in information technology and structures. Third, investment in industries with low markup ratios are more likely to be affected by exchange rate movements.

Keywords: Exchange rates; Domestic demand and components (search for similar items in EconPapers)
JEL-codes: D24 F4 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2005
New Economics Papers: this item is included in nep-bec, nep-fmk, nep-ifn and nep-tid
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:05-22

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